OPINION> Commentary
Images of doom matter in raising prices
By Robert J. Shiller (China Daily)
Updated: 2008-07-22 07:43

Could the television image we've all seen of the Greenland ice cap crumbling into the ocean because of global warming somehow -indirectly and psychologically - be partly responsible for high oil and other commodity prices?

In fact, psychology also matters in speculative markets, and perhaps that image of the Greenland ice disappearing makes it seem all too plausible that everything else - land, water, even fresh air - is running out too.

Let's take a case study, the last generalized boom-bust cycle in commodity prices, which caused these prices generally to rise (more or less) from some time in the 1960s until the 1980s, and then generally to fall until the mid-1990s. Maybe images matter just as much as substance in explaining that.

The conventional "fundamental" explanation for that cycle relates it to political events. The 1973-74 oil crisis is said to have been due to the cutoff of oil following the Arab-Israeli Yom Kippur War. The 1979-81 oil crisis is said to have reflected the cutoff in oil due to the Iranian Revolution and the Iran-Iraq war. The drop in oil prices after the mid-1980s is said to have been due to the collapse of the OPEC oil cartel.

But some economists doubt that these events tell the whole story. Sure, there were sharp movements in oil prices corresponding to these events, but maybe there were other, even more important, factors affecting general trends in oil prices. After all, these events don't really explain why prices of other commodities often followed that of oil.

Maybe more important than those wars in the 1970s was that people throughout the world got worried about running out of things. This was the time of the "great population scare", which transformed thinking worldwide, no doubt contributing to higher commodity prices while the fear lasted.

There seemed to be some basis for this scare. The rate of increase in the world's population rose from 1.8 percent in 1951 to 2.1 percent in 1971. But those were just dry statistics. Images likely mattered more.

In 1948, the astronomer Fred Hoyle said, "Once a photograph of the earth, taken from outside, is available - once the sheer isolation of the earth becomes plain - a new idea as powerful as any in history will be let loose."

A generation later, he was proven right. The first photograph of the earth from space came as part of the Apollo project in November 1967. One of the Apollo astronauts, James B. Irwin, who landed on the moon in 1971, said of his view of the earth, "It was so far away ... a little ball in the blackness of space. That does something to your soul. ... We all came back humanitarians. ... We saw how fragile our planet is and yet how beautiful. We saw how we must learn to work together, to love each other."

Let's not discount that statement. That image of the earth from space had a profound psychological effect, and we all saw it. Maybe that image was at least part of the reason why people became so worried in the 1970s about population running ahead of resources.

The Club of Rome's monumental book "The Limits to Growth" came out in 1972, with a picture of the earth on its cover. The book, written by a team of scientists, predicted disastrous shortages and mass starvation due to population pressure. Despite scientific critics of the Club of Rome's methods, the public was ready to believe the dire forecast.

The great population scare led to various efforts around the world, notably to the family planning policy instituted in China in 1979. Partly due to such efforts, as well as to a change in family values, the rate of growth of the world's population began a long decline, to 1.1 percent in 2005. That gradual decline led to the gradual loss of concern about limits to growth. Commodity prices fell, too.

Today, we remain mostly unconcerned about global population growth. But, in the last 10 years or so, we have become concerned about something else: rapid world economic growth. While it may seem that no image in the last decade was so dramatic as the first photo of the earth from space, think again.

Try searching YouTube, for example, on Greenland ice. More generally, the Internet gives a sense of vastness to the world's economic activity that was never available before. The ability to communicate via e-mail to everyone in the world creates a sense of the world's smallness relative to the abundance of people in it.

We have seen photographs of hurricane and typhoon activity due to global warming, affecting people in Louisiana or Myanmar. We have seen devastation from the 2004 Indian Ocean tsunami, interpreted as a sign of crowding at the coasts.

The North Pole turned into a lake for the first time in 2000. We see aerial photos of the Aral Sea drying up. We practically cannot buy caviar from the Caspian Sea any more. The European Space Agency announced in September 2007 that satellite photos showed that the Northwest Passage appeared clear of ice for shipping for the first time ever, and that the Northeast Passage is almost clear.

With so many vivid images of a shrinking and damaged planet, is it really any wonder that human psychology is ripe for high commodity prices?

The author is a professor of economics at Yale University, chief economist at MacroMarkets LLC The Korea Herald/Asia News Network

(China Daily 07/22/2008 page9)